Core Compliance Blog

whistleblower protection

The SEC (Securities and Exchange Commission) Whistleblower Program, created in the wake of the 2008 financial crisis as part of the Dodd-Frank act, has been nothing short of a success (at least, from the standpoint of regulators and whistleblowers).

Since its inception in 2010, more than 22,000 tips have been provided to the SEC by whistleblowers resulting in offenders paying over a billion dollars in penalties including disgorgement of ill-gotten profits and recovering losses for investors victimized by bad actors. As a result of the success of these enforcement actions, over two hundred million dollars has been awarded to over 50 whistleblowers.[1]

Over this period, the SEC has had time to evaluate the success of the program, and with close to a decade’s worth of data in their hands, they’ve proposed amendments that will not only continue to incentivize whistleblowers, specifically creating higher payouts in order to incentivize whistleblowing in cases where the payout might be low (even though the damage to retail investors by the alleged fraud might still be severe).

Proposed Amendments to Rule 21F-6

The proposed amendments to Rule 21F-6 include allowing the SEC discretion to determine increasing payouts to whistleblowers of up to $2 million dollars in order to create incentives for potential whistleblowers who may be reluctant to provide information to the SEC due to concern over low awards.[2] Because of the nature of whistleblowing itself and the risk and possibility of damage to their career, their social standing, and even threats to themselves or their families, payouts must carry enough incentive for a whistleblower to come forward.

Other amendments shore up issues with the original Rule, such as eliminating the possibility of a double payout through multiple whistleblower programs, capping payouts at $30 million, clarifying the scope of the rule (for example, whistleblower protection extends only to employees who have reported a violation), and giving the SEC the ability to bar individuals who are submitting frivolous claims from submitting in the future.

Though most firms create employment agreements in good faith, it’s possible that the language in some firms’ written agreements might outline “penalties” and carry the threat of discipline or termination in an effort to discourage whistleblowing; however, these types of agreements could be seen as retaliatory and result in regulatory sanctions.